701 F.

2d 927
10 Bankr.Ct.Dec. 469, Bankr. L. Rep. P 69,328

FIRST NATIONAL BANK OF MOBILE d/b/a

Bankamericard/Visa,
Plaintiff-Appellant,
v.
Harold Eugene RODDENBERRY and Jayne Hettie
Roddenberry,
Defendants-Appellees.
No. 81-7952.

United States Court of Appeals,

Eleventh Circuit.
April 1, 1983.

Lawrence B. Voit, Mobile, Ala., for plaintiff-appellant.

Stephen M. Gudac, Mobile, Ala., for defendants-appellees.
Appeal from the United States District Court for the Southern District of
Alabama.
Before HILL and ANDERSON, Circuit Judges, and LYNNE* , District
Judge.
JAMES C. HILL, Circuit Judge:

This appeal raises the important and timely issue of when liabilities resulting
from abuse of bank credit cards are exempt from general discharge through
bankruptcy proceedings. In Davison-Paxon Co. v. Caldwell, 115 F.2d 189 (5th
Cir.1940), cert. denied, 313 U.S. 564, 61 S.Ct. 841, 85 L.Ed. 1523 (1941), a
divided panel of the former Fifth Circuit concluded that the purchase of goods
on credit, with an intentional concealment of insolvency at the time of purchase,
was not exempt from general discharge. Upon reviewing the scope of DavisonPaxon, we conclude that the rule enunciated in the decision does not warrant
mechanical application. Instead, each case involving modern credit transactions

must be examined individually to determine if the challenged liability is of the

type anticipated to be discharged in Davison-Paxon. It is our conclusion that in
transactions involving bank credit cards the analysis must involve a
determination of whether the bank unconditionally revoked the cardholder's
right to use and possession of that card and if so when the cardholder became
aware of such revocation. Debts incurred prior to unconditional revocation may
be dischargeable. However, debts incurred with the knowledge that one is not
entitled to possession or use of a credit card are nondischargeable.
I.
2

In November 1975, Harold and Jayne Roddenberry applied for a joint Bank
Americard with the First National Bank of Mobile. Their application was
approved, and they were issued two credit cards with a total credit limit of
$400. In January 1978, their credit limit was automatically extended to $600.
This extension was pursuant to an across-the-board increase to all credit
customers in good standing. In May 1978, their limit again was extended to
$1,000, this time at the request of the Roddenberrys.

By April 21, 1978, however, the Roddenberrys already had an outstanding

balance on their account of $1,620.41. Thus, on May 5, 1978, the bank mailed
its first form letter to the Roddenberrys informing them that they had exceeded
their credit limit and requesting that no further charges be made until the
balance was reduced to a permissible level. A similar form letter was mailed to
the Roddenberrys on May 19, 1978. Although payments to the bank in June and
July reduced the account's balance to $1,078.32, in August, the balance began
to rise once again. Thus, a third form letter was mailed on August 25, 1978.

In September 1978, an official of the bank's credit department telephoned the

Roddenberrys. During one such conversation, Mr. Roddenberry promised that
he would make no further charges on the account. Mr. Roddenberry apparently
kept his promise. In October 1978, however, the couple separated, and Mrs.
Roddenberry moved away, taking with her both of the credit cards. It is not
disputed that all charges on the account after September 1978 were made by
Mrs. Roddenberry.

Upon leaving her husband, Mrs. Roddenberry embarked on what can only be
characterized as a credit card spending spree. From September through
November she obtained $1,300 in cash advances from the bank's automatic
teller. The bank therefore telephoned the Roddenberrys who promised to pay
the $2,583.17 account in full within one week from November 21, 1978. When
payments were not forthcoming, the bank maintains that it tried to contact the

Roddenberrys by leaving messages on the Roddenberrys' telephone answering

recorder.
6

Not until December 11, 1978, did the bank finally program its automatic teller
to pick up the credit cards if they were used to obtain a cash advance. In
addition, on December 12, 1978, the bank claims that the National
Authorization Center for BankAmericard/VISA was advised to instruct any
merchant calling for an authorization to pick up the cards.1 The December
balance on the Roddenberrys' account was $3,098.92.

After December, Mrs. Roddenberry did not attempt to obtain any further cash
advances. Instead, she engaged in the creative practice of purchasing items less
than $50.00 in value. By making numerous small purchases, Mrs. Roddenberry
was able to use her charge cards without detection because merchants generally
are required to call-in for authorization only if the total purchase price of a sale
exceeds $50.00. Thus, in January 1979, Mrs. Roddenberry successfully made
91 separate charges, each for less than $50.00. This raised the balance on the
Roddenberrys' account to $5,221.77 as of January 22, 1979.

The bank again contacted Mr. Roddenberry in January. At that time, he assured
the bank that he would try to recover the cards from his estranged wife. When
Mr. Roddenberry did speak with his wife, he apparently informed her that she
was not to make any further charges with the credit cards. However, Mrs.
Roddenberry told her husband that she needed the cards to "live on" until she
could find a job. She testified that she used the cards to buy merchandise for
friends, who in turn would pay her the cash she used to support herself.

On March 2, 1979, the Roddenberrys filed petitions for bankruptcy. The

balance of their credit card account as of the date of filing was $7,050.55, but
Mrs. Roddenberry continued to make purchases with the credit cards even after
the bankruptcy petitions were filed.2 The bank subsequently filed a complaint
seeking to have the debts declared nondischargeable because the money and
merchandise were obtained under false pretenses within the meaning of section
17a(2) of the former Bankruptcy Act. 11 U.S.C. Sec. 35a(2) (1976). Relying on
Davison-Paxon Co. v. Caldwell, 115 F.2d 189 (5th Cir.1940), cert. denied, 313
U.S. 564, 61 S.Ct. 841, 85 L.Ed. 1523 (1941), the bankruptcy court held that
the debts incurred prior to bankruptcy filings were dischargeable because they
were not obtained by means of actual overt false pretenses or representations.
Those charges incurred after the filings, on the other hand, were not
dischargeable. The district court affirmed.

II.

10

Section 17a(2) of the Bankruptcy Act of 1898 provides a limited exception to

the general discharge of debts in bankruptcy. If the challenged liabilities are
"for obtaining money or property by false pretenses or false representations,"
then the debts are not dischargeable through bankruptcy proceedings. 11 U.S.C.
Sec. 35a(2) (1976).3 Underlying this exception is the principle that bankruptcy
is designed to provide a fresh start for honest debtors who unexpectedly fall
into financial difficulty. See Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54
S.Ct. 695, 699, 78 L.Ed. 1230 (1934); Williams v. United States Fidelity &
Guaranty Co., 236 U.S. 549, 554-55, 35 S.Ct. 289, 290, 59 L.Ed. 713 (1915).
By rendering fraudulently obtained debts nondischargeable, the bankruptcy
laws implicitly attempt to discourage abuse of bankruptcy proceedings by those
whom the laws were not intended to protect.

11

The issue raised by this appeal involves the scope of conduct which will render
a debt nondischargeable under this exception. More specifically, the issue is
whether Mrs. Roddenberry's purchases and cash advances were obtained by
false pretenses or false representations within the meaning of the statute.
According to the bankruptcy court, the decision of Davison-Paxon mandates a
discharge of the Roddenberrys' credit card debts even if Mrs. Roddenberry had
no intention of paying for the goods she purchased. However, the scope of
Davison-Paxon 's application must be viewed in light of its factual context.

12

The course of events leading to Davison-Paxon began when a creditor,

Davison-Paxon Company, filed a state court action for payment of merchandise
purchased by Lizabeth Caldwell. Caldwell subsequently filed a bankruptcy
petition and received a general discharge. Accordingly, the creditor amended its
state court suit to allege that Caldwell had obtained the merchandise by means
of a fraudulent concealment of her insolvency. Caldwell responded by seeking
to enjoin the state court action on grounds that the debts had been discharged
through bankruptcy proceedings. The district court agreed that the debts had
been discharged, and the court of appeals affirmed. 115 F.2d at 189-191. In so
ruling, the court of appeals concluded that section 17a(2) "does not except from
discharge, debts created by obtaining credit through concealment of insolvency
and present inability to pay." Id. at 191.

13

Davison-Paxon has been subject to severe criticism because it is understood to

reward a debtor's fraudulent concealment of insolvency. 4 A closer examination
of the decision, however, reveals that by discharging Caldwell's debts, the court
did not intend to reward deceitful non-disclosure. Instead, it sought to deny a
particularly improvident creditor the special privilege of an exemption from a
general discharge. Although the court acknowledged that Caldwell "did not act
in a straight-forward and honest way in not making full disclosure of her

financial condition ...," it went on to stress that the Bankruptcy Act was
remedial statute for the benefit of debtors and that exemptions to discharge
therefore should be construed narrowly. 115 F.2d at 191.
14

The practical wisdom of the court's refusal to extend the special protection of a
section 17a(2) exemption to Davison-Paxon Company is evident upon
examination of the circumstances surrounding the debt. These circumstances
are detailed in the district court's opinion, In re Caldwell, 33 F.Supp. 631
(N.D.Ga.1940). Initially, the district court noted that the liabilities which the
creditor sought to have exempted from discharge were accumulated over a three
year period. Moreover, it was only after Caldwell's application for bankruptcy
that Davison-Paxon Company "suddenly discovered that Bankrupt 'purchased
merchandise listed on the itemized statement' when she was 'insolvent and had
no present intention to pay for the same,' in spite of the fact that the account
had been running under the eyes of an expert credit man for a period of two
years and eleven months without this fact having been discovered ...." 33
F.Supp. at 633. After listing the table of credits and debits in Caldwell's
account, the district court observed in its finding of facts,

15

Nothing unusual appears from this account, which shows the amount of
purchases and the credits thereon arising out of return of merchandise and cash
payments. It certainly does not disclose the existence of false representations or
the use of false pretenses, but on the other hand, shows a pretty even
distribution of charges, credits and payments throughout the period, although
the unpaid balance of each month added to that of the preceding month
gradually increased the indebtedness until it reached the amount sued for. The
account indicates an unwise extension of credit rather than fraud on the part of
the purchaser. The statement, from which the above tabulation was made,
showed innumerable items purchased over a period of three years, and it is
inconceivable that she obtained all of them by false pretenses or false
representations, and thereby deceived Respondent to its injury.

16

Id. at 634.

17

In evaluating the factual context of Davison-Paxon, it also is important to

recognize the nature of the relationship between the debtor and the creditor.
Caldwell purchased merchandise directly from her creditor. The relationship
was "one on one" and occurred within a controlled environment in which the
creditor knew what was purchased, when it was purchased and where it was
purchased. This is very different from credit arrangement involving bank credit
where a third party creditor has far less control over the use of its cards. This
distinction is illustrated in the present case by the bank's inability to recover the

credit cards in the Roddenberrys' possession. Recovery was impeded not only
by Mrs. Roddenberry's attempts to avoid detection, but also by the bank's
inability to determine where she would use the cards next.
18

The nature of the debtor-creditor relationship also relates to the significance of

the concealment. When Caldwell purchased merchandise she was presenting
herself to the creditor with whom she had direct and continuous dealings. With
each transaction, the creditor had both the opportunity and the incentive to take
some precaution in assuring her creditworthiness. Conversely, when Mrs.
Roddenberry purchased merchandise she did not present herself to her creditor,
and arguably took affirmative steps to avoid such a confrontation. Moreover,
the merchants with whom she had direct contact had no incentive to perform a
credit check because they were assured payment from the bank so long as the
charge was less than $50.00. Indeed, to have performed a credit check would
have resulted in a lost sale. The concept of intentional concealment, therefore,
loses its significance when third parties provide credit services.

19

Since Davison-Paxon was decided in 1940, the nature of certain credit

transactions, and the relationship between debtors and creditors, have changed
dramatically. Yet, although the Fifth Circuit has attempted to limit the impact
of Davison-Paxon, the decision never has been expressly overruled. For
example, in Sears, Roebuck & Co. v. Boydston, 520 F.2d 1098 (5th Cir.1975),
the court reluctantly affirmed a referee's finding of fact that a bankrupt did not
intend to conceal his insolvency. The court noted that Davison-Paxon
apparently mandated discharge even if the bankrupt did not intend to pay for
the goods, but did not address the issue. Nevertheless, the court commented
that "[t]he rationale underlying Davison-Paxon has been seriously eroded in the
modern world of credit transactions and the decision has been the subject of
much criticism." 520 F.2d at 1101 (citations omitted). Again in Sears, Roebuck
& Co. v. Wood, 571 F.2d 284 (5th Cir.1978), the issue of Davison-Paxon 's
continued validity was skirted by the conclusion that no evidence demonstrated
an intentional concealment of insolvency on the part of the bankrupt. Id. at 285.
In both Boydston and Wood, the court paid lip service to Davison-Paxon while
actually focusing on the intent of the debtor and examining the facts for
evidence of fraudulent concealment. This type of treatment of Davison-Paxon
has led a number of bankruptcy courts within the circuit to conclude that
Davison-Paxon no longer is good law.5

20

Notwithstanding its critics, Davison-Paxon retains its validity under limited

circumstances--when the credit transactions involve a one-on-one relationship
between debtor and creditor of the type common in 1940. When the third party
creditors are involved, more analysis is necessary. This analysis, however, must

be guided by the principles underlying Davison-Paxon that discharge

exceptions are to be narrowly construed and that improvident creditors are not
to be afforded special protections in bankruptcy for the assumption of common
business risks.
III.
21

The element of risk is inherent in the issuance of bank credit cards. Our "creditcard economy" encourages widespread voluntary risk-taking on the part of
those issuing cards. Once credit cards are issued (if not fraudulently obtained),
the bank has agreed to trust the cardholder and to extend credit, and once credit
is extended, the bank must decide when and if credit will be revoked. It is not
the function of courts to determine when a bank ought to revoke credit. It also
is of little consequence that the bank can show that the terms and conditions
said to apply to use of the card have been violated. The mere breach of credit
conditions is of minimum probative value on the issue of fraud because banks
often encourage or willingly suffer credit extensions beyond contractual credit
limits. Indeed, banks have a definite interest in permitting charges beyond
established credit limits because of the high finance charges typical in such
transactions. In re Talbot, 16 B.R. 50, 52 (Bkrtcy.M.D.La.1981). Banks are
willing to risk non-payment of debts because that risk is factored into the
finance charges. Because the risk is voluntary and calculated, section 17a(2)
should not be construed to afford additional protection for those who unwisely
permit or encourage debtors to exceed their credit limits.

22

Bearing in mind these considerations, we hold that the voluntary assumption of

risk on the part of a bank continues until it is clearly shown that the bank
unequivocally and unconditionally revoked the right of the cardholder to
further possession and use of the card, and until the cardholder is aware of this
revocation. A card issuer, acting upon its own judgment, may elect to continue
to extend credit; it shall be presumed to do so until clear revocation has taken
place. Only after such clear revocation has been communicated to the
cardholder will further use of the card result in liabilities obtained by "false
pretenses or false representations" within the meaning of section 17a(2)'s
exemption from discharge. Purchases made with knowledge that one is not
entitled to either use or possession constitute the type of deception intended to
be exempted from discharge. It is more than an intentional concealment of
insolvency; it is an affirmative misrepresentation that one is entitled to possess
and use the card.

23

The Roddenberrys, however, maintain that the application of Davison-Paxon is

irrelevant because the bank did not rely upon any fraudulent misrepresentations

implied or otherwise. Because the Roddenberrys' account was constantly above

its established credit limit, the bankruptcy court agreed that the bank did not
rely upon any implied misrepresentation not to pay. Although not incorrect, this
finding is relevant only as it pertains to the time prior to the bank's
unconditional revocation of the Roddenberrys' possession and use of the card.
Debts arising prior to the communication of revocation are part of the risk
assumed by the bank. During this period, the bank risked non-payment by
authorizing conditional possession of the cards. This risk was assumed despite
the Roddenberrys' apparent inability to pay, and the credit they obtained during
this period was implicitly authorized by the bank. However, once the
unequivocal revocation of credit privileges was communicated, the bank no
longer agreed to assume this risk. Beyond the point of revocation, Mrs.
Roddenberry was not merely concealing an inability to pay, but rather was
affirmatively defrauding the bank with whom she no longer had any type of
relationship.
24

Unfortunately, the bankruptcy court's findings of fact were developed from a

Davison-Paxon perspective, and as a result crucial findings inadvertently were
omitted. It therefore is necessary to remand this case for a determination of
whether the bank unconditionally revoked the Roddenberrys' right to all use
and possession of the cards and if so when that revocation was communicated
to Mrs. Roddenberry.

25

REVERSED and REMANDED.

Honorable Seybourn H. Lynne, U.S. District Judge for the Northern District of
Alabama, sitting by designation

The bankruptcy court made no specific findings with respect to when and if the
automatic tellers were reprogrammed or when or if the authorization center was
notified

The balances for the Roddenberrys' account were as follows:

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT
VIEWABLE

This case is governed by the Bankruptcy Act of 1898 because the

Roddenberrys' bankruptcy petition was filed prior to the effective date of the
Bankruptcy Code of 1978. Section 17a of the former statute reads in pertinent
part as follows:

Sec. 17 Debts Not Affected by a Discharge.

a. A discharge in bankruptcy shall release a bankrupt from all of his provable
debts, whether allowable in full or in part, except such as ... (2) are liabilities
for obtaining money or property by false pretenses or false representations....
This provision has been recodified at 11 U.S.C. Sec. 523(a)(2)(A) which reads:
Sec. 523. Exceptions to discharge
(a) A discharge under section 727, 1141, or 1328(b) of this title does not
discharge an individual debtor from any debt-(2) for obtaining money, property, services, or an extension, renewal, or
refinance of credit, by-(A) false pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor's or an insider's financial condition....
Although the recodified version is substantially identical to section 17a, Brown
v. Felsen, 442 U.S. 127, 129 n. 1, 99 S.Ct. 2205, 2208 n. 1, 60 L.Ed.2d 767
(1979), Congress has incorporated certain modifications which may alter the
outcome in certain cases where debtors obtain credit without a present intention
of repayment. See generally Rendleman, Liquidation Bankruptcy Under the 78
Code, 21 Wm. & Mary L.Rev. 575, 687-88 (1980). Indeed, one commentator
suggests that Congress' addition of the term "actual fraud" to the "false
pretenses and false representation" language of section 17a was intended to
eliminate the distinction between overt and implied misrepresentation drawn in
Davison-Paxon. Zaretsky, The Fraud Exception to Discharge Under the New
Bankruptcy Code, 53 Am.Bankr.L.J. 253, 257 (1979). At this time, we express
no opinion with respect to this construction of section 523(a)(2)(A).
4

E.g., Case Comment, 39 Mich.L.Rev. 812 (1941); Case Comment, 54

Harv.L.Rev. 873 (1941). See generally 3 Collier on Bankruptcy p 523.08 at n.
20 (15th ed. 1982)

E.g., In re Quintana, 4 B.R. 508, 510 (Bkrtcy.S.D.Fla.1980); see, e.g., In re

Vegh, 14 B.R. 345 (Bkrtcy.S.D.Fla.1981); In re Pitts, 10 B.R. 557
(Bkrtcy.M.D.Fla.1981); In re Banasiak, 8 B.R. 171 (Bkrtcy.M.D.Fla.1981).
Each of these cases was decided under 11 U.S.C. Sec. 523(a)(2)(A)